Question

2. Being an intelligent manager of an electric utility company, you decide to take advantage of what’s called capacity utilization rates provided by the Federal Reserve to help you decide if more or less spending is a wise course to take. This month’s capacity utilization rate applicable to your company is 82%. Based on this information, what will you specifically advise the company to do in order to either expand or contract capacity? Explain why.

Answer 1

Ans.

Capacity utilization rate is extent or level to which the productive capacity of firm is being used in generation of goods and services. It is expressed in percentage by dividing actual output to potential output multiplied by 100.

This month capacity utilisation rate of company is 82% which suggests that company's production costs decrease as output increase. This capacity can be expanded till 95% to 100% as this indicates efficient operation management. By expanding capacity company can operate at efficiency i.e by illumination of cost structure in short and long term. The company can increase production without incurring expensive overhead costs such as purchasing new equipment or machines.